Updated: Jan 22
You must’ve heard the saying that winning a trade is like tossing a coin and getting the right side. I’ve heard it many times as well. The way this is explained is that the market has only two outcomes, just like the two sides of a coin: it can either go up (bullish) or down (bearish), so the chances of winning are 50/50.
This logic is overly simplistic and very misleading. The reality is much more complex, as more than 70% of traders lose money in trading.
Firstly, this ‘theory’ doesn’t take into account the dollar amount of profit in a winning trade; a trade with $1 profit can also be regarded as a 'winner' or the right side of the coin. Conversely, a trade with a $1000 loss is a 'loser' or the wrong side. Imagine how many winners you need in this case to cover up for the losers and break even!
Secondly, the market doesn’t simply move up or down in a straight line, but fluctuates in a pattern that appears sideways or choppy on some time frames, bullish on some and yet bearish on others. The market can appear to be trending upwards on the 10 minute chart, downwards on the 1 hour chart and still upwards on the daily chart. Where prices are headed is a matter of subjective interpretation, which depends on your strategy, trading style and emotional behaviour. The 'outcome' of any trade can never be seen as having a 50% probability of success and can, in no way be predicted exactly.
The distinguishing ability of the successful trader is that trading discipline prevails over emotions to creates the best possible outcomes. The sides of the coin are infinite as a trade can have any outcome in terms of profits or losses; you must learn to choose the best possible side.